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Compilation of Pro Forma Financial Information 2627

AR Section 120

Compilation of Pro Forma FinancialInformation

Issue date, unless otherwise indicated: July 2005

Source: SSARS No. 14; SSARS No. 17

.01 Statements on Standards for Accounting and Review Services(SSARSs) provide guidance concerning the standards and procedures applica-ble when an accountant is engaged to report on compiled financial statementsor submits financial statements to his or her client or third parties. By defini-tion, presentations of pro forma financial information are not financial state-ments. This statement expands SSARSs to apply when an accountant is en-gaged to report or issues a report on compiled pro forma financial information.If, however, the pro forma financial information is included as supplementaryinformation, the accountant should refer to paragraph .53 of section 80, Compi-lation of Financial Statements. [Revised, December 2010, to reflect conformingchanges necessary due to the issuance of SSARS No. 19.]

.02 A compilation of pro forma financial information is limited to assistingmanagement (owners) in presenting financial information without undertakingto obtain or provide any assurance that there are no material modificationsthat should be made to that information. [Revised, December 2010, to reflectconforming changes necessary due to the issuance of SSARS No. 19.]

.03 The objective of pro forma financial information is to show what thesignificant effects on historical financial information might have been had aconsummated or proposed transaction (or event) occurred at an earlier date.Pro forma financial information is commonly used to show the effects of trans-actions such as the following:

• Business combination

• Change in capitalization

• Disposition of a significant portion of the business

• Change in the form of business organization or status as an au-tonomous entity

• Proposed sale of securities and the application of the proceeds

.04 This objective is achieved primarily by applying pro forma adjustmentsto historical financial information. Pro forma adjustments should be based onmanagement's assumptions and give effect to all significant effects directly at-tributable to the transaction (or event).

.05 Pro forma financial information should be labeled as such to distin-guish it from historical financial information. This presentation should describethe transaction (or event) that is reflected in the pro forma financial informa-tion, the source of the historical financial information on which it is based,the significant assumptions used in developing the pro forma adjustments, andany significant uncertainties about those assumptions. The presentation should

©2016, AICPA AR §120.05

2628 Statements on Standards for Accounting and Review Services

also indicate that the pro forma financial information should be read in conjunc-tion with the related historical financial information and that the pro forma fi-nancial information is not necessarily indicative of the results (such as financialposition and results of operations, as applicable) that would have been attainedhad the transaction (or event) actually taken place earlier.

Conditions for Compiling Pro FormaFinancial Information

.06 Nothing in this statement is intended to preclude an accountant fromassisting management (owners) in presenting pro forma financial informationand submitting such pro forma financial information to the client or to thirdparties without the issuance of a compilation report, unless the accountant hasbeen engaged to report on such compiled pro forma financial information. Ifan accountant assists management (owners) in presenting pro forma finan-cial information,[1] the accountant should consider how such a presentationof pro forma financial information will be used. The accountant should con-sider the potential of being associated with pro forma financial informationand the likelihood that the user may inappropriately infer, through that as-sociation, an unintended level of reliance on the information. If the accoun-tant believes that he or she will be associated with the information, the ac-countant should consider issuing a compilation report so a user will not in-fer an unintended level of reliance on the information. [Revised, December2010, to reflect conforming changes necessary due to the issuance of SSARSNo. 19.]

.07 An engagement to report on compiled pro forma financial informa-tion may be undertaken as a separate engagement or in conjunction with acompilation of financial statements. The accountant may agree to compile proforma financial information only if the document that contains the pro formafinancial information includes (or incorporates by reference) the historical fi-nancial statements of the entity on which the pro forma financial informa-tion is based. Historical interim financial information may be presented incondensed form. In the case of a business combination, the document shouldinclude (or incorporate by reference) the appropriate historical financial infor-mation for the significant constituent parts of the combined entity. [Revised,December 2010, to reflect conforming changes necessary due to the issuance ofSSARS No. 19.]

.08 Additionally, the historical financial statements of the entity (or, inthe case of a business combination, of each significant constituent part of thecombined entity) on which the pro forma financial information is based musthave been compiled, reviewed, or audited. The accountant's compilation or re-view report or the auditor's report on the historical financial statements shouldbe included (or incorporated by reference) in the document containing the proforma financial information.

Understanding With the Entity.09 When an accountant is engaged to report on compiled pro forma fi-

nancial information, the accountant should establish an understanding with

[1] [Footnote deleted, December 2010, to reflect conforming changes necessary due to the issuanceof Statement on Standards for Accounting and Review Services (SSARS) No. 19.]

AR §120.06 ©2016, AICPA


management regarding the services to be performed and should document theunderstanding through a written communication with management. Such anunderstanding reduces the risks that either the accountant or managementmay misinterpret the needs or expectations of the other party. For example,it reduces the risk that management may inappropriately rely on the accoun-tant to protect the entity against certain risks or perform certain functions thatare management's responsibility. The accountant should ensure that the under-standing includes the objectives of the engagement, management's responsibil-ities, the accountant's responsibilities, and the limitations of the engagement.In some cases, the accountant may establish such understanding with thosecharged with governance. An understanding with management and, if applica-ble, those charged with governance regarding a compilation of pro forma finan-cial information should include the following matters:

• The objective of a compilation of pro forma information is to assistmanagement in presenting such financial information.

• The accountant utilizes information that is the representation ofmanagement (owners) without undertaking to obtain any assur-ance that there are no material modifications that should be madeto the pro forma financial information in order for the pro formafinancial information to be in conformity with the applicable fi-nancial reporting framework.

• Management is responsible for the preparation and fair presenta-tion of the pro forma financial information in accordance with theapplicable financial reporting framework.

• Management is responsible for designing, implementing, andmaintaining internal control relevant to the preparation and fairpresentation of the pro forma financial information.

• Management is responsible for the prevention and detection offraud.

• Management is responsible for identifying and ensuring that theentity complies with the laws and regulations applicable to itsactivities.

• Management is responsible for making all financial records andrelated information available to the accountant.

• The accountant is responsible for conducting the engagement inaccordance with SSARSs issued by the AICPA.

• A compilation differs significantly from a review or an audit ofpro forma financial information. A compilation does not contem-plate performing inquiry, analytical procedures, or other proce-dures performed in a review. Additionally, a compilation does notcontemplate obtaining an understanding of the entity's internalcontrol; assessing fraud risk; testing accounting records by obtain-ing sufficient appropriate audit evidence through inspection, ob-servation, confirmation, or the examination of source documents(for example, cancelled checks or bank images); or other proce-dures ordinarily performed in an audit. Accordingly, the accoun-tant will not express an opinion or provide any assurance regard-ing the pro forma financial information.

©2016, AICPA AR §120.09


• The engagement cannot be relied upon to disclose errors, fraud,2or illegal acts.3

• The accountant will inform the appropriate level of managementof any material errors and of any evidence or information thatcomes to the accountant's attention during the performance ofcompilation procedures4 that fraud or an illegal act may have oc-curred.5 The accountant need not report any matters regardingillegal acts that may have occurred that are clearly inconsequen-tial and may reach agreement in advance with the entity on thenature of any such matters to be communicated.

• The effect of any independence impairments on the expected formof the accountant's compilation report, if applicable.

[Revised, December 2010, to reflect conforming changes necessary due to theissuance of SSARS No. 19.]

.10 When the accountant is engaged to report on compiled pro forma fi-nancial information and evidence or information comes to his or her attentionduring the engagement that fraud or an illegal act may have occurred, the ac-countant should adhere to the communication requirements contained in para-graphs .54–.55 of section 80. [Revised, December 2010, to reflect conformingchanges necessary due to the issuance of SSARS No. 19.]

Performance Requirements.11 When the accountant is engaged to report on compiled pro forma fi-

nancial information, he or she should adhere to the compilation performancerequirements contained in paragraphs .06–.13 of section 80. [Revised, Decem-ber 2010, to reflect conforming changes necessary due to the issuance of SSARSNo. 19.]

.12 Before issuance of a compilation report on pro forma financial infor-mation, the accountant should read such compiled pro forma financial informa-tion, including the summary of significant assumptions,6 and consider whetherthe information appears to be appropriate in form and free of obvious materialerrors. In this context, the term error refers to mistakes in the compilation ofthe pro forma financial information, including arithmetical or clerical mistakes,and mistakes in the application of accounting principles, including inadequate

2 For purposes of this statement, fraud is an intentional act that results in a misstatement incompiled pro forma financial information.

3 For purposes of this statement, illegal acts are violations of laws or government regulations,excluding fraud.

4 Performance requirements with respect to an engagement to compile pro forma financial infor-mation are contained in paragraphs .11–.12.

5 Whether the act is, in fact, fraudulent or illegal is a determination that is normally beyond theaccountant's professional competence. An accountant, in reporting on pro forma financial informa-tion, presents himself or herself as one who is proficient in accounting and compilation services. Theaccountant's training, experience, and understanding of the client and its industry may provide a ba-sis for recognition that some client acts coming to his or her attention may be fraudulent or illegal.However, the determination about whether a particular act is fraudulent or illegal would generallybe based on the advice of an informed expert qualified to practice law or may have to await finaldetermination by a court of law.

6 The accountant may not report on compiled pro forma financial information if the summary ofsignificant assumptions is not presented. Nothing in this statement should be interpreted to precludethe accountant from reporting on compiled pro forma financial information when management electsto omit substantially all disclosures. In that situation, the accountant should follow the guidance inparagraph .20 of section 80, Compilation of Financial Statements. [Footnote revised, December 2010,to reflect conforming changes necessary due to the issuance of SSARS No. 19.]

AR §120.10 ©2016, AICPA


disclosures. [Revised, December 2010, to reflect conforming changes necessarydue to the issuance of SSARS No. 19.]

Documentation Requirements.13 When the accountant is engaged to report on compiled pro forma finan-

cial information, he or she should adhere to the documentation requirementscontained in paragraphs .14–.15 of section 80. [Paragraph added, December2010, to reflect conforming changes necessary due to the issuance of SSARSNo. 19.]

Reporting Requirements.14 The accountant's objective in reporting on compiled pro forma financial

information is to prevent misunderstanding of the degree of responsibility theaccountant is assuming when his or her name is associated with the pro formafinancial information. When the accountant issues a compilation report on proforma financial information, the basic elements of the report are as follows:

a. Title. The accountant's compilation report should have a title thatclearly indicates that it is the accountant's compilation report.The accountant may indicate that he or she is independent inthe title, if applicable. Appropriate titles would be "Accountant'sCompilation Report" or "Independent Accountant's CompilationReport."

b. Addressee. The accountant's report should be addressed as appro-priate in the circumstances of the engagement.

c. Introductory paragraph. The introductory paragraph in the ac-countant's report should

i. identify the entity whose pro forma financial informationhas been compiled.

ii. state that the pro forma financial information has beencompiled.

iii. identify the pro forma financial information that has beencompiled.

iv. specify the date or period covered by the pro forma finan-cial information.

v. reference the financial statements from which the histor-ical financial information is derived and include a state-ment on whether such financial statements were compiled,reviewed, or audited. (The report on pro forma financialinformation should refer to any modifications in the ac-countant's or auditor's report on historical financial state-ments.)

vi. include a statement that the accountant has not audited orreviewed the pro forma financial information and, accord-ingly, does not express an opinion or provide any assuranceabout whether pro forma financial information is in accor-dance with the applicable financial reporting framework.

vii. if the compilation was performed in conjunction with acompilation of the entity's financial statements, the para-graph should so state and indicate the date of the accoun-tant's compilation report on those financial statements.Furthermore, any departure from the standard report on

©2016, AICPA AR §120.14


those statements should also be disclosed if considered rel-evant to the presentation of the pro forma financial infor-mation.

d. Management's responsibility for the pro forma financial informa-tion and for internal control over financial reporting. A statementthat management (owners) is (are) responsible for the prepara-tion and fair presentation of the pro forma financial informationin accordance with the applicable financial reporting frameworkand for designing, implementing, and maintaining internal con-trol relevant to the preparation and fair presentation of the proforma financial information.

e. Accountant's responsibility. A statement that the accountant'sresponsibility is to conduct the compilation in accordance withSSARSs issued by the AICPA.

f. A statement that the objective of a compilation is to assist man-agement in presenting financial information in the form of proforma financial information without undertaking to obtain or pro-vide any assurance that there are no material modifications thatshould be made to the pro forma financial information.

g. A separate paragraph explaining the objective of pro forma finan-cial information and its limitations.

h. Signature of the accountant. The manual or printed signature ofthe accounting firm or the accountant, as appropriate.

i. Date of the accountant's report. The date of the compilation report(the date of completion of the compilation should be used as thedate of the accountant's report).

Procedures that the accountant might have performed as part of the compila-tion engagement should not be described in the report.

See exhibit B, "Illustrative Accountant's Compilation Report on Pro Forma Fi-nancial Information," for an illustrative compilation report.

[Paragraph renumbered and revised, December 2010, to reflect conformingchanges necessary due to the issuance of SSARS No. 19.]

.15 Each page of the pro forma financial information compiled by the ac-countant should include a reference, such as "See accountant's compilation re-port" or "See independent accountant's compilation report." [Paragraph renum-bered and revised, December 2010, to reflect conforming changes necessary dueto the issuance of SSARS No. 19.]

[.16] [Paragraph renumbered and deleted, December 2010, to reflect con-forming changes necessary due to the issuance of SSARS No. 19.][7–8]

Reporting When the Accountant Is Not Independent.17 When the accountant is issuing a report with respect to a compila-

tion of pro forma financial information for an entity, with respect to which theaccountant is not independent, the accountant's report should be modified. Inmaking a judgment about whether he or she is independent, the accountantshould be guided by the AICPA Code of Professional Conduct. The accountant

[7–8] [Footnotes deleted, December 2010, to reflect conforming changes necessary due to the is-suance of SSARS No. 19.]

AR §120.15 ©2016, AICPA


should indicate his or her lack of independence in a final paragraph of the ac-countant's compilation report. An example of such a disclosure would be[9] Ifthe accountant is not independent, he or she should specifically disclose thelack of independence. However, the reason for the lack of independence shouldnot be described. When the accountant is not independent, the following shouldbe included as the last paragraph of the report:

I am (we are) not independent with respect to XYZ Company.

The accountant is not precluded from disclosing a description about the rea-son(s) that his or her independence is impaired. The following are examples ofdescriptions the accountant may use:

a. I am (We are) not independent with respect to XYZ Company as ofand for the year ended December 31, 20XX, because I (a memberof the engagement team) had a direct financial interest in XYZCompany.

b. I am (We are) not independent with respect to XYZ Company asof and for the year ended December 31, 20XX, because an individ-ual of my immediate family (an immediate family member of oneof the members of the engagement team) was employed by XYZCompany.

c. I am (We are) not independent with respect to XYZ Company asof and for the year ended December 31, 20XX, because I (we) per-formed certain accounting services (the accountant may includea specific description of those services) that impaired my (our) in-dependence.

If the accountant elects to disclose a description about the reasons his or herindependence is impaired, the accountant should ensure that all reasons areincluded in the description.[Paragraph renumbered and revised, December 2010, to reflect conformingchanges necessary due to the issuance of SSARS No. 19.]

.18 This section is effective for engagements entered into after December15, 2005. Early application is permitted. [Paragraph renumbered, December2010, to reflect conforming changes necessary due to the issuance of SSARSNo. 19.]

[9] [Footnote deleted, December 2010, to reflect conforming changes necessary due to the issuanceof SSARS No. 19.]

©2016, AICPA AR §120.18


.19

Exhibit A

Illustrative Engagement Letter for a Compilation of ProForma Financial Information

[Appropriate Salutation]This letter is to confirm our understanding of the terms and objectives of ourengagement and the nature and limitations of the services we will provide.We will perform the following services:We will compile, from information you provide, the pro forma financial infor-mation of XYZ Company as of December 31, 20XX, and issue an accountant'sreport thereon in accordance with Statements on Standards for Accounting andReview Services issued by the American Institute of Certified Public Accoun-tants.The objective of a compilation is to assist you in presenting financial informationin the form of pro forma financial information. We will utilize information thatis your representation without undertaking to obtain or provide any assurancethat there are no material modifications that should be made to the pro formafinancial information in order for the pro forma financial information to be inconformity with [the applicable financial accounting framework (for example,accounting principles generally accepted in the United States of America)].You are responsible for

a. the preparation and fair presentation of the pro forma financialinformation in accordance with [the applicable financial reportingframework (for example, accounting principles generally acceptedin the United States of America)].

b. designing, implementing, and maintaining internal control rele-vant to the preparation and fair presentation of the pro formafinancial information.

c. preventing and detecting fraud.d. identifying and ensuring that the entity complies with the laws

and regulations applicable to its activities.e. making all financial records and related information available to

us.We are responsible for conducting the engagement in accordance with SSARSsissued by the AICPA.A compilation differs significantly from a review or an audit of financial in-formation. A compilation does not contemplate performing inquiry, analyticalprocedures, or other procedures performed in a review. Additionally, a compila-tion does not contemplate obtaining an understanding of the entity's internalcontrol; assessing fraud risk; testing accounting records by obtaining sufficientappropriate audit evidence through inspection, observation, confirmation, theexamination of source documents (for example, cancelled checks or bank im-ages); or other procedures ordinarily performed in an audit. Accordingly, wewill not express an opinion or provide any assurance regarding the pro formafinancial information being compiled.Our engagement cannot be relied upon to disclose errors, fraud, or illegal acts.However, we will inform the appropriate level of management of any material

AR §120.19 ©2016, AICPA


errors, and of any evidence or information that comes to our attention duringthe performance of our compilation procedures, that fraud may have occurred.In addition, we will report to you any evidence or information that comes toour attention during the performance of our compilation procedures regardingillegal acts that may have occurred, unless they are clearly inconsequential.If, during the period covered by the engagement letter, the accountant's inde-pendence is or will be impaired, insert the following:

We are not independent with respect to XYZ Company. We will disclose that weare not independent in our compilation report.

If, for any reason, we are unable to complete the compilation of your pro formafinancial information, we will not issue a report on such schedule as a result ofthis engagement.Our fees for these services . . . .We will be pleased to discuss this letter with you at any time.If the foregoing is in accordance with your understanding, please sign the copyof this letter in the space provided and return it to us.[*]

Sincerely yours,________________________[Signature of accountant]Acknowledged:XYZ Company_______________________President_______________________Date[As amended, effective for compilations and reviews of financial statements forperiods ending on or after December 15, 2008, by SSARS No. 17. Paragraphrenumbered and revised, December 2010, to reflect conforming changes neces-sary due to the issuance of SSARS No. 19.]

[*] [Footnote deleted, December 2010, to reflect conforming changes necessary due to the issuanceof SSARS No. 19.]

©2016, AICPA AR §120.19


.20

Exhibit B

Illustrative Compilation Report on Pro Forma FinancialInformation

Compilation report on pro forma financial information reflecting a businesscombination prepared in accordance with accounting principles generally ac-cepted in the United States of America

Accountant’s Compilation Report

[Appropriate Salutation]I (we) have compiled the accompanying pro forma financial information of XYZCompany as of December 31, 20XX, reflecting the business combination of theCompany and ABC Company. The historical condensed financial statementsare derived from the historical unaudited financial statements of XYZ Com-pany, which were compiled by me (us), and of ABC Company, which were com-piled by another (other) accountant(s).1 I (we) have not audited or reviewed theaccompanying pro forma financial information and, accordingly, do not expressan opinion or provide any assurance about whether the pro forma financial in-formation is in accordance with accounting principles generally accepted in theUnited States of America.Management (owners) is (are) responsible for the preparation and fair presen-tation of the pro forma financial information in accordance with accountingprinciples generally accepted in the United States of America and for design-ing, implementing, and maintaining internal control relevant to the prepara-tion and fair presentation of the pro forma financial information.My (our) responsibility is to conduct the compilation in accordance with State-ments on Standards for Accounting and Review Services issued by the Amer-ican Institute of Certified Public Accountants. The objective of a compilationis to assist management in presenting financial information in the form of proforma financial information without undertaking to obtain or provide any as-surance that there are no material modifications that should be made to thepro forma financial information.The objective of this pro forma financial information is to show what the sig-nificant effects on the historical financial information might have been had thetransaction (or event) occurred at an earlier date. However, the pro forma fi-nancial information is not necessarily indicative of the results of operationsor related effects on financial position that would have been attained had thetransaction (or event) actually occurred earlier.Paragraph the accountant may add after the previous paragraph when manage-ment has elected to omit substantially all disclosures, but the pro forma financial

1 When one set of historical financial statements is audited or reviewed and the other is audited,reviewed, or compiled, wording similar to the following would be appropriate:

The historical condensed financial statements are derived from the historical financial state-ments of XYZ Company, which were compiled by me (us), and of ABC Company, which werereviewed by another (other) accountant(s), appearing elsewhere herein (or incorporated by ref-erence).

If either accountant's review report or auditor's report includes an explanatory paragraph or is mod-ified, that fact should be referred to within the report.

AR §120.20 ©2016, AICPA


information is otherwise in conformity with accounting principles generally ac-cepted in the United States of America.[Signature of accounting firm or accountant, as appropriate][Date][Paragraph added, December 2010, to reflect the presentation style and con-forming changes necessary due to the issuance of SSARS No. 19.]

©2016, AICPA AR §120.20

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